Fitch Ratings has reaffirmed what most of us already knew or witnessed in part during the Covid-19 led lockdowns of 2020 and 2021. The agency now believes that the supply chain disruptions in China could result in accelerated diversion of export production from the region to India and parts of Southeast Asia.
Lingering weakness in the property market and renewed Covid-19 lockdowns, along with rising global inflation and interest rates, weigh on China’s near-term economic growth prospects, resulting in targeted policy easing. However, we do not expect a material reversal in regulatory reforms already implemented, it said.
However, the agency also warned that the crisis in China could also indirectly affect India around the financing costs if global investors become wary of risks that could result from the weaker growth outlook for China.
Where India can get some headroom
Fitch noted that financial headroom was limited in India but felt that given the country’s low export exposure to China, things could be fine. “This suggests that its direct vulnerability to weaker Chinese growth is relatively modest, although India could still be affected indirectly, for example, through higher financing costs if international investor risk aversion increases as a result of a weaker growth outlook for China,” it said.
“Further supply-chain disruption in China from Covid-19 restrictions could accelerate the diversion of export production from China, for example, to India and southeast Asia,” Fitch said in a report titled ‘Apac Exposure to Slower China Growth’. This could create longer-term credit upside for some Apac (Asia Pacific) countries, it said.
Around the APAC region, the Covid-19 led economic shows in China could have negative economic effects as they are the biggest export market for most countries in the region. In addition, they also happen to be a crucial supplier of intermediate products whose availability could be interrupted, affecting regional exports.
“A significant slowdown in China would also represent the third major external shock in the last few years for Apac sovereigns, following the Covid-19 pandemic and the fallout from the Russia-Ukraine war,” Fitch said while cautioning that successive shocks could further erode fiscal space and exacerbate credit risks in frontier markets, potentially eroding their political and institutional stability.